Spot values at a glance:
Chinese shares declined after a surprise hike in short-term interest rates by China’s central bank, though there was little impact more broadly in Asia as investors digested the Fed’s latest rate increase of its own and a fairly dovish statement. The dollar was flat after sliding overnight along with US Treasury yields while gold rebounded.
Fed Hikes As Expected:
The Fed followed through on an expected interest-rate increase and raised their forecast for economic growth in 2018, even as they stuck with a projection for three hikes in the coming year.
“This change highlights that the committee expects the labour market to remain strong, with sustained job creation, ample opportunities for workers and rising wages,” Chair Janet Yellen told reporters Wednesday in Washington following the decision. In her final scheduled press conference, Yellen noted that her nominated successor, Jerome Powell, has been part of the consensus shaping the Fed’s gradual rate-hike strategy.
In a key change to its statement announcing the decision, the FOMC omitted prior language saying it expected the labour market would strengthen further. Instead, Wednesday’s statement said monetary policy would help the labour market “remain strong.” That suggests Fed officials expect improvement in the job market to slow.
Investors interpreted last night’s statement to be dovish, with both the 10yr Treasury yield and US dollar declining in the aftermath.
US Core Inflation Softens:
Core CPI, which excludes food and fuel prices, in November unexpectedly rose 0.1% month-on-month, less than the prior and expected rise of 0.2%. Headline CPI was in line with estimates, rising 0.4% from a month ago, accelerating from the prior gain of 0.1%.
The less-than-expected core inflation last month could mean officials may be hard-pressed to raise interest rates more aggressively in 2018.
US Tax Reform:
House and Senate Republicans are getting close to a deal on compromise legislation to overhaul America’s tax code, President Trump said Wednesday. So starts the final push to get the bill signed into law before the Christmas holiday.
Republican lawmakers reached a deal in principle on the legislation earlier on Wednesday, but the bill’s advance is clouded by the result of the Senate special election in Alabama, where Republican Roy Moore lost to Democrat Doug Jones. The Senate’s top Democrat, Chuck Schumer of New York, called for Majority Leader Mitch McConnell to delay a vote on the tax bill until Jones is sworn in, which won’t happen until later this month or in early January.
That would reduce the GOP’s majority in the Senate to 51-49. Republicans have other plans though, and hope to vote on the bill soon, before Alabama officials can certify the result of the election and while they can still afford two defections by Senate Republicans. That would provide Trump a much-needed political victory, even though polls show the legislation is unpopular among most Americans.
Crude Oil Rally Falters:
An OPEC monthly report raised its outlook for non-OPEC supply in 2018 by 300,000 a barrels a day, as its projections for American output caught up with those of the US government. As a result, an initiative by OPEC and Russia to clear a global oil glut by cutting output, previously seen succeeding in the third quarter of 2018, will take effect more slowly, according to Bloomberg News.
American shale explorers, who grew more efficient during the industry’s 3-year downturn, are locking in future revenues as US prices near $60/bbl, potentially readying for a new surge in drilling. OPEC increased estimates of its competitors’ output in 2018 for the first time since the forecast was introduced last summer. It expects rival supplies will increase by about 1 million barrels a day, or about 1.7 percent, in 2018.
Spot gold, heading for its worst quarter in a year, rose the most in 3 weeks, gaining back to the previous support of $1,260/Oz. While gold prices have slumped amid bets that higher rates will hurt demand for non-interest-bearing assets, they have historically rallied in the months after recent Fed rate hikes. The key level will be $1,260/Oz – a rise back above it could foreshadow further gains by the year’s end, however, should it struggle to gain higher, $1,260/Oz could be a price for gold bears to initiate short positions.
Money managers tripled their short positions in gold last week, the fastest such move since record-keeping started in 2006, US government data showed. The jump in bearish bets came as prospects for higher rates and progress on tax legislation deepened a slump for bullion prices.
May Hits a Wall:
UK lawmakers voted 309 to 305 on Wednesday evening to change PM Theresa May’s planned legislation so that it guarantees they will get a “meaningful vote” on the final deal to leave the European Union at the end of negotiations in 2019. And rather than the Brexit hardliners who have so often undermined her, this time it was pro-Europeans who defected. Lawmakers in the House of Commons will now have the power to veto the withdrawal treaty before the UK leaves the EU if they don’t like the terms.
China Data Dump:
A slew of Chinese economic data was released Thursday. Retail sales last month rose 10.2% year-on-year, accelerating from October’s 10.0% gain but lower than the 10.3% predicted. Industrial output over the same period gained 6.1% from a year ago, in line with expectations but down from a 6.2% gain in October. Fixed-asset investment excluding rural households increased 7.2% in the first 11 months of the year over the same period in 2016, in line with estimates.
An intensifying pollution crackdown is weighing on industrial output as authorities also push ahead with a drive to reduce borrowing, adding greater pressure on investment growth. Consumers remain a key growth prop, with e-commerce giant Alibaba Group Holding Ltd. pulling in a record $25 billion in sales during the Singles’ Day shopping bonanza last month. Any dollar strengthening on the back of tighter US monetary policy could prompt the PBOC to more aggressively raise rates after its surprise increase today.
PBOC Raises Rates:
China’s central bank unexpectedly raised borrowing costs following the Federal Reserve’s decision to tighten monetary policy. Hours after the Fed’s quarter percentage-point move, the PBOC increased the rates it charges in open-market operations and on its medium-term lending facility, though making smaller adjustments than its US peer.
Recovering sentiment on the yuan, a yield gap near the widest in more than 2 years between US and Chinese 10yr sovereign bonds, and still-moderate inflation offer breathing room for policy makers as 2017 comes to a close. But abstaining from a rate increase may have fuelled risks of yuan depreciation, especially in an environment where a prospective US tax cut may lead to some capital repatriation.
Australian Jobs Boost:
Australian employment sprinted ahead for a 14th straight month in November, the longest stretch of gains since the early 1990s, while the jobless rate remained at the previous month’s, near a 5-year low.
61,600 jobs were added in November, more than the 19,000 estimated and the prior month’s upwardly-revised 7,800-gain. Full-time employment rose by 41,900, while part-time jobs rose by 19,700. The unemployment rate held steady at 5.4%.
According to Reuters News, to put things in perspective, a comparable increase in US payrolls would be 736,000. Australia’s annual jobs growth rate at 3.2% is more than twice the US pace of 1.4% and the second fastest on record.
Wage growth continues to be a concern though; wage growth is crawling at 2.0%, only a sliver above inflation of 1.8%. That is curtailing the spending power of Australian consumers who are already saddled with a mountain of debt.
Weekly Thematic News:
A previously unknown ring of Russian-language hackers has stolen as much as $10 million from US and Russian banks in the last 18 months, according to a Moscow-based cyber-security firm that runs the largest computer forensics laboratory in Eastern Europe.
“Criminals have changed tactics and are now focusing on banks rather than their clients, as was standard operating procedure in the past,” Dmitry Volkov, the head of Group-IB’s cyber intelligence department, said by phone. Russia, considered a hotbed of government-backed information attacks, increasingly finds itself a victim of cybercrime.
Group-IB said the US banks were targeted by gaining access to their card-processing system and then opening accounts at the compromised institutions. The attackers removed limits on the legitimate bank cards and used mules to withdraw cash from ATMs. The virus was so stealthy that, in at least one instance, a bank was successfully robbed twice.
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Smart Real Estate Singapore:
A Bloomberg report last Wednesday stated that Singapore developers may extend their share rally into 2018 on a reviving home market, according to money managers and analysts, who say the central bank’s warning on a potential oversupply may not play out for years. After double-digit gains this year, Morgan Stanley sees a 42% jump in shares of CapitaLand Ltd., the nation’s largest developer, and a 24 percent increase in City Developments Ltd., the second-biggest, in the next 12 months. Property companies such as City Developments and UOL Group Ltd. are among the top performers in Singapore in 2017, with developers collectively on track for their best annual performance in 5 years.
Signs of a revival in Singapore’s property market include record prices paid for land deals, the first increase in home prices in four years, and the first gain in office rents in 2-1/2 years. The buoyant sentiment was tempered last week by the Monetary Authority of Singapore, which flagged the risk of rising vacancies amid slowing population growth.
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China Online US:
According to Caixin news report last week, Chinese lawmakers are moving closer to finalizing the nation’s first e-commerce law, hoping it will take effect as early as next year. The legislation, which will oversee a wide range of online activities of both buyers and sellers, aims to offer better and more institutionalized protection of consumers amid the exponential growth of online businesses in recent years.
China is the largest online retail market in the world. In 2016, the value of merchandise and services traded on e-commerce platforms reached 26.1 trillion yuan ($3.92 trillion), up 19.8% from a year ago, according to data from the Ministry of Commerce. The e-commerce industry and related sectors are employing 37 million people, the ministry said.
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USDSGD slipped back below the 1.3500 handle after the Fed’s dovish statement last night, which signalled inflation may remain below target. The month-to-date low of 1.3420 is likely to limit further moves lower. The likely scenario to play out for the rest of the year is more sideways movement between the 1.3400 – 1.3600 range.
AUDUSD rose to its strongest in a month as traders boosted bets the RBA will tighten policy after a stellar Australian jobs report earlier today. The currency pair pushed through the 0.7650 resistance, and is on track to test its 200-day moving average near the 0.7700 handle.
The Canadian dollar rallied against its broadly weaker US counterpart after the Federal Reserve raised interest rates, as expected, with investors betting that Canada will benefit from an improved outlook for the US economy. Canada sends about 75% of its exports to the US.
USDCAD slipped to a 1-week low Thursday, retreating from the 1.2900 handle tested earlier in the week.
USDCNH declined by the most in 2 weeks, after the PBOC unexpectedly raised the borrowing costs it charges in open-market operations and its medium-term lending facility after the Fed tightened monetary policy.
The key support lies around 6.5500; a decline below it may pave the way for more downside towards the 2017-low of 6.4436.
USDJPY declined from a 1-month high on Thursday amid broad US dollar weakness following the Fed’s rather-dovish statement last night.
Hopes for the currency pair to retest the 114.50 resistance for the fifth time since May is fading. Instead, the 200-day moving average at 111.65 is more likely to be tested soon.
GBPUSD regained above 1.3400 after parliament passed an amendment to the European Union Withdrawal Bill that gives lawmakers the power to force the government choose between a “soft Brexit” and an indefinite suspension of Article 50.
The pound will be closely watched today with the Bank of England expected to keep interest rates on hold later today. Investors will be keeping their ears peeled for clues on the future path of UK’s monetary policy.